We model a financial market in which investor beliefs are shaped by representativeness. Investors overreact to a series of good news, because such a series is representative of a good state. A few bad news do not change investor minds because the good state is still representative, but enough bad news leads to a radical change in beliefs and a financial crisis. The model generates debt over-issuance, "this time is different" beliefs, neglect of tail risks, under- and over-reaction to information, boom-bust cycles, and excess volatility of prices in a unified psychological model of expectations.

Neglected risks: the psychology of financial crises

Gennaioli, Nicola
;
Shleifer, Andrei;
2015

Abstract

We model a financial market in which investor beliefs are shaped by representativeness. Investors overreact to a series of good news, because such a series is representative of a good state. A few bad news do not change investor minds because the good state is still representative, but enough bad news leads to a radical change in beliefs and a financial crisis. The model generates debt over-issuance, "this time is different" beliefs, neglect of tail risks, under- and over-reaction to information, boom-bust cycles, and excess volatility of prices in a unified psychological model of expectations.
2015
0002-8282
The American economic review. Papers and Proceedings
Gennaioli, Nicola; Shleifer, Andrei; Vishny, Robert
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/3984474
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